When confronted with complaints about the falling value of the dollar, the U.S. official is said to have responded to his European visitors: "The dollar is our currency, but it's your problem." That was in 1971. The politician to whom this statement is attributed was John Connally, who at that time served as the secretary of the U.S. Treasury. His boss was Richard Nixon, the same President who used a word for the Italian lira which politeness prohibits repeating. Nevertheless, Connally and Nixon made clear how matters were.

In the meantime, the Italian lira no longer exists. It has merged into the euro, when the single European currency was established in 1999. The endeavors to create a common currency had begun in the early 1970s, when the Europeans began to construct their own currency systems based on stable exchange rates and off the dollar standard.

The Bretton Woods System (named after the resort where the conference took place in New Hampshire in 1944) bestowed a singular privilege to the U.S. when the dollar became the point of reference for the new currency system. With the other member countries fixing their currencies to the U.S. dollar, and the U.S. dollar officially fixed to gold at 35 dollars per troy fine ounce, it seemed as if an ideal combination had been found to avoid international monetary disruptions.

The gold anchor was meant to curb an excessive production of U.S. dollars. When foreign countries had a trade surplus, they theoretically could have used the excess dollars and asked the U.S. to exchange them for gold. With a fixed parity between dollar and gold, this would have restricted dollar creation. However, France was one of the only countries that took the agreement literally and demanded that the U.S. exchange the earned dollars for gold instead of accumulating them as international reserves like other countries did which had persistent current account surpluses such as Japan and Germany.

The system as it evolved in the 1960s provided a free ride for the United States, and it did not take long for the U.S. to abuse this privilege. Pursuing the goal of expanding the welfare state along with ever more active foreign military involvements, the U.S. could no longer fulfill the agreement of making foreign currencies exchangeable into gold. The gold shortage of the late 1940s and of the 1950s had turned into a dollar glut. World inflation began its rise.

Under the transformed system, the need for adaptation was unilaterally transferred to foreign currencies. The system, which had once foreseen the change of currency parities as the exemption rather than the rule, entered into a phase of high instability when fixing and re-fixing of foreign currencies to the dollar became increasingly necessary.

In 1971, with the so-called "Smithsonian agreement," a final attempt was made to save the old system when the U.S. devalued its currency against gold and a series of other currencies, but soon it became clear that the Bretton Woods System was no longer viable. In 1973, with the adoption of the new rule that each country could choose its own currency arrangement, the Bretton Woods System had come to an end.

Since then, the international monetary system is more like a "non-system" than a "system," or, more precisely, the international monetary system consists of a multitude of different currency arrangements ranging from currency unions and currency blocs to freely floating exchange rates with many other schemes in between such as unilateral fixed parities, managed floating or currency boards, and currency baskets.

As early as 1970, the members of the European Economic Community, which later transformed into an expanded European Union decided to prepare for the establishment of a common currency. In 1999, the euro as a common currency was instituted, first for banking transactions and then, on January 1, 2002, as the sole legal tender in the member countries of the euro area. Currently, twelve European countries take part in the European Monetary Union.

In terms of absolute valuation, the euro is not very much of a better currency than the U.S. dollar. In economic decision-making, however, things happen on the margin and decisions are taken based on relative valuations. Given similar degrees of liquidity and financial market sophistication, the euro has become increasingly attractive for currency diversification, particularly due to the favorable foreign investment position of the euro area compared to that of the United States.

After some initial weakness—probably due to fears that the new arrangement might fail—the euro has gained markedly in value against the U.S. dollar over the past three years. The American currency is facing a rival. An increasing number of central banks announced plans to shift part of their international reserves into the European currency. The dollar is still the currency of the U.S., but a sinking dollar is no longer just a problem for foreigners, it is also a problem for the United States.

In the past, the United States could count on having the monopoly of issuing the currency with the highest degree of liquidity and financial market integration. Although there were stronger currencies than the U.S. dollar, such as the Swiss currency or the Japanese yen and the German mark, these currencies could not rival the U.S. dollar because of their limited market share.

The existence of the euro has changed this constellation. As to its market size, the euro area is up to the U.S. dollar with the tendency of further augmenting this position when new members of the European Union will adopt the single currency, some non-EU countries will peg their exchange rates to that of the European monetary union or when oil producers will change to euros when pricing their exports.

For a while in the 1990s, it appeared as if the U.S. dollar could regain its unique position. The 1990s saw Japan—the apparent commercial threat to the U.S. in the 1980s—sink into a prolonged stagnation. Germany, the other major player in the international trade arena, began to entangle itself in the morass of a costly and economically ill-conceived unification process.

After the fall of the Soviet Union and the dissolution of the Soviet Empire, the United States had emerged as the sole global military might, and, so it seemed, also as the undisputed economic and political power with global influence and far-reaching dominance. On this basis, the role of the dollar as the major reserve currency and the main currency for international transactions experienced a second spring.

In the 1990s, the new global constellation could be interpreted as the replay of the endings of World War I and World War II with the United States emerging for a third time on top of the world. In the 1990s, the triad of global dominance seemed well in place of the United States: an unrivalled military might, a booming and innovative economy and the only issuer of a global currency.

Since the turn to the 21stcentury, however, these factors of dominance have increasingly come under challenge. The mania of the New Economy has ended. The U.S. economy still registers high growth rates due to unrelenting consumption spending, but regarding its productive capacity, it is in a precarious state, as it is indicated by the persistence of high trade deficits. The military power of the United States in its present form is largely inefficient with respect to the relation between financial costs and political outcome. Finally, and probably most important, the dollar no longer holds the monopoly of being the only available international reserve currency.

While after 1919 and after 1945, the United States emerged as the largest international creditor, the U.S. became the world's largest debtor nation in the course of the 1990s. Also in contrast to the earlier world wars, the economies of Russia, Western Europe, and South East Asia were not devastated when the Cold War ended. As to their productive capacity and financial resources, these regions are on an even footing with the United States or even are superior—at least concerning their foreign investment position.

The performance of the U.S. economy in the past century owes much to the role of the U.S. dollar in the international monetary system, and a large part of attaining this role was the result of the political and military supremacy that the United States had gained since 1919. In the 20th century, the position of the U.S. dollar in the world represented a major underpinning of the prosperity at home, which in turn fed back positively on the dollar's foreign role.

As long as fiat money rules, currencies, particularly the standing of the dollar and the euro, also reflect their value as a "political currency." They represent the degree of global political and financial power and in turn they provide the basis for attaining supremacy. They are tools in the hands of governments in the struggle for dominance.

With the dollar privilege passing, the U.S. confronts a radically different situation than in the past, and a tormenting process of changing the accustomed world-view is on the horizon. However, even as of now, the role of the euro as a rival to the U.S. dollar is rarely a subject of concern in the United States. It is the same with additional power shifts that are going on, all of them potentially reducing or even eliminating the dominant role of the U.S. currency in the world economy.

New alliances are emerging that neither politically nor militarily may be benign to the United States. Also, older powers have maintained their might. The Soviet Union has disappeared, but Russia remains a military power matching the nuclear overkill capacity of the United States. China is beyond any immediate control or persuasion by the United States.

The current U.S. President identified an "axis of evil", composed of countries with relatively modest economic, financial, and military clout—and situated far away from the shores of North America. But how about the other axis that is being formed, right at the U.S. border and stretching down the South American continent. The alliance between Fidel Castro of Cuba, Hugo Chavez of Venezuela, and Lula da Silva of Brazil? What about the constant rumors that Brazil strives to become a nuclear power? What about the deals that are being made between Latin American countries and China with the perspective of forming an economic symbiosis between China's need for food and oil, and this region's abundance of natural resources?

Then there is another axis that has come into existence in the past few years: the fraternization between the leaders of France, Germany and Russia. This entente covers the Euro-Asian continent, the geo-strategic heart of the world. It represents an alliance that is ready and capable of challenging U.S. influence in almost any aspect. What do these constellations imply for the role of the U.S. dollar?

Anytime soon one may expect that countries like Russia or Venezuela and other oil producers will turn to the euro as the currency for their oil exports. The move to the euro as a currency for international transactions and reserves during the past couple of years may represent only the initial stage of long-lasting process. Currency shifts of such proportions start slowly but over time they will gain more momentum. By now, the euro may have passed the threshold that had limited its global use. Once a means of payment is widely accepted, it becomes increasingly more attractive for a wider use.

There is a consensus currently among the major players in international finance, particularly among the relevant governments and central banks, that an abrupt fall of the dollar should be avoided. Japan, the largest foreign holder of U.S. assets, depends on U.S. protection in the face of the growing muscle of China in its region. China itself most likely would also like to avoid a dollar crash at least as long as it has not yet spent a considerable part of its dollar reserves in the effort to secure future supplies of food and oil around the world. The Europeans do not want a much weaker dollar because as of now it is mainly exports that are booming in the major economies of this region.

In contrast to the wishes, however, the fundamental geo-strategic trends call for a reduced global role of the dollar. While the temporary interests of the major global players are directed at maintaining dollar stability and thus avoiding a rapid demise of the dollar's role as a global currency, these desires are not congruent with the longer-term aspirations of the foreign players themselves.

The international monetary system has entered a stage when it becomes more difficult to manage a conflict that is getting out of control the longer it lasts. Inexorably, the constellation moves to a point where the potential loss will outweigh perceived benefits—not only for the holders of U.S. dollar reserves, but also for the United States itself.

Under such conditions, economic and financial decisions in the private sector are prone to be made under false premises. One must not forget that three of the most essential prices in the modern monetary economy are politically determined or manipulated prices: the oil price, interest rates, and the exchange rates. Taking away the interventions, the price that the U.S. pays for imported oil, and the price for money and credit should already be much higher than they currently are. At their present levels, they reflect a position of the U.S. dollar in the global system that can hardly be maintained.

Given the importance of these three prices for the economy and their potential direction, it is not difficult to assess the prospect for asset prices, particularly those of stocks, bonds, and real estate which all must come down when the fall of the dollar continues.

The US dollar was struggling near a two-month low against the euro on Friday as the market braced for fresh trade data that were likely to show a further widening of the trade gap. As if this weren't trouble enough for the besieged greenback, US Federal Reserve chairman Alan Greenspan stirred up the market Thursday night saying foreign investors would reduce their US asset holdings at some point, while new findings came to light that China is indeed doing so.

Saying he is not "overly" concerned about the record US trade gap or heavy consumer debt, Greenspan said the budget deficit gives him the shivers. The US current account deficit widened to a record US$164.7 billion from July through September, the most recent figures available, equivalent to 5.6% of gross domestic product (GDP). "Our current account deficit and household debt burdens do not strike me as overly worrisome, but that is certainly not the case for our fiscal deficit," Greenspan told the Council on Foreign Relations in New York. "Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability, because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances."

According to the high priest of finance, international investors have only modestly shifted their portfolios away from dollar assets so far. But he warned that they might at some point decide their portfolios are too dollar-centric, ominously adding that if the dollar keeps dropping, foreign exporters may start looking elsewhere.

Greenspan's comments came close on the heels of Japanese Prime Minister Junichiro Koizumi's startling remark on Thursday that Japan needs to diversify its foreign-exchange reserves, reviving fears of Asian central banks cutting their giant dollar reserves. Any move by Japan, which has the largest foreign-exchange reserve in the world ($840 billion), to reduce its dollar holdings could be disastrous for the greenback. The dollar has already been dropping against the yen for four straight weeks now. Koizumi's statement, though later qualified by his finance minister, will only prolong the agony.

US dollars accounted for 63.8% of the world's currency reserves at the end of 2003, down from 66.9% two years earlier, according to International Monetary Fund (IMF) figures released last April. A survey this January commissioned by the Royal Bank of Scotland Plc and conducted by London-based Central Banking Publications Ltd showed that central banks across the world were boosting euro holdings. Almost 70% of the 56 central banks surveyed said they had increased exposure to the euro.

Citing a more recent finding, Asia Times Online reported on Thursday (Dollar catching Asian flu) that Asian central banks have been quietly switching their dollar holdings to regional currencies for at least three years now. A study by the Bank of International Settlements (BIS), which acts as a bank for the world's central banks, shows that the ratio of dollar deposits held in Asian offshore reserves declined to 67% in September, down from 81% in the third quarter of 2001. India was the biggest seller, reducing its dollar assets from 68% of total reserves to just 43%. China, which directly links the yuan to the dollar and is under US pressure to allow a freer movement of its currency, trimmed the dollar share from 83% to 68% over the same period.

Bloomberg reported on Friday that according to an estimate by Lehman Brothers Holdings Inc, China's central bank has been cutting the share of its currency reserves held in dollars and replenishing them with euros. Some 76% of China's reserves were in dollars last year, down from 82% in 2003, said Lehman, the fifth-largest US securities firm.

There has been debate in China on whether it at all needs such a huge foreign-exchange reserve. China's forex chief, Guo Shuqing, a member of the National Committee of the China Political Consultative Conference (CPCC) and director general of the State Administration for Foreign Exchange Management (SAFEM), said that as an item of international payments, the growth of the foreign-exchange reserve is the result of the macroeconomic operation, but not the objective China is particularly pursuing. An adequate foreign-exchange reserve is favorable for payment abilities, comprehensive national power and creditworthiness, reducing risks of reform and safeguarding financial security, he said.

Guo pointed out, however, that excessive growth could be detrimental. In a rare and stern warning against the inflow of speculative funds, or "hot money", in the name of investment, he told local governments not to lure foreign investment "haphazardly". Regulators have been playing down the amount and impact of hot money over the past year, but Guo said China might see "no end of trouble in the future" unless local governments are acutely aware of risk mitigation in soaking in foreign funds.

"China pays great attention to speculative funds," Guo said in an interview with Xinhua on the sidelines of the annual session of the National Committee of the Chinese People's Political Consultative Conference, China's top advisory body. "Foreign-exchange administration departments and other macroeconomic departments are investigating the issue and will punish illegal activities severely."

China's foreign-exchange reserve added as much as $206.7 billion last year alone. Guo said the overall inflow of capital is "normal and legal" and reflects the "market scenario", but there are also some "worrisome" problems. "Fake foreign investment" is actually being used to purchase yuan-denominated assets and commercial housing on speculative purpose, he noted. Hot money has pushed housing prices to a very high level, making cities look "prosperous" but doing no good to the investment climate, as it leads to higher living and business costs. Typically, this means great risks for local financial institutions, enterprises and even individuals. When the real-estate bubble bursts, they will suffer from huge losses, Guo said. Hot money has also sneaked into China under capital accounts or based on no real trade, he claimed.

Guo said China's foreign-exchange reserve, second only to Japan's, is quite enough to pay the country's debts. But its debts in foreign currency may snowball to an amount that engenders "systematic risks". He revealed that newly added foreign-exchange reserves last year include $60.6 billion in foreign direct investment, $32 billion in trade surplus, $30 billion from foreign-exchange clearing under the account of imports and exports by enterprises, $35 billion in foreign debts, more than $10 billion in service trade surplus, $30 billion in individual asset transfer and earnings being brought about, and more than $10 billion in securities investment, among others.

Mountains of foreign-exchange reserves have long been an excuse used by some countries, especially the United States, to demand appreciation of the yuan, which now floats against the US dollar within a narrow band. But Premier Wen Jiabao reiterated in his government work report last week that China would keep the yuan "basically stable".

Dollar being a core Value and resent slide against major currencies like never before, can this be seen as a beginning of the End of the empire?

It very well can. Furthermore, imagine when America finally pulls out of the quagmire in the Middle East. The dollar will take a nosedive like never before. Confidence in America will drastically plummet. It doesn't bode too well. To ensure youre safety and future I suggest anyone invest in commodities such as gold, silver, or oil. Non commodity things such as houses, and currencies are a ticking time bomb built on credit expansion, and when the bubble bursts, those who own commodities will gain. Remember the dire situation of Argentina? I pray we do not face something of that nature.

It very well can. Furthermore, imagine when America finally pulls out of the quagmire in the Middle East. The dollar will take a nosedive like never before.

would u elaborate y $ would fall after pulling out?

are there any major differences between what happened in argnetina and what U.S. is currently facing?I recall that during early 90's they also crashed, so the infrastructure would seem not to be strong to begin with.

are there any major differences between what happened in argnetina and what U.S. is currently facing?I recall that during early 90's they also crashed, so the infrastructure would seem not to be strong to begin with.

Well, I should have used the word "accelerated". The dollar is already falling, therefore at the geopolitical turning point when the U.S. pulls out of the Middle East, it admits defeat, thereby accelerating the fall of the dollar. This is because alot of foreign confidence in America came from its military might. When that breaks so does confidence in its economy.

But it is evident from the first articles of this thread that US is increasingly dependent of a number of large economies which are not US allies and could potentially move to undemine US economic strength. However, this is not yet evident. In case of China for example ... if it wants to intentionally contribute to depreciation of the dollar it will start losing its nearly $100bln trade surpluss with the US. So it is not that easy for countries that depend on the US for their exports to manipulate the currency market without immediate negative consequences for them. Russia on the other hand could easily make such a move.

Armenians are slow in embracing their national currency, the dram,despite its dramatic appreciation against the world's two most importantcurrencies, the Central Bank of Armenia (CBA) said on Thursday. Ahousehold survey conducted by the bank suggests that while many peopleare now prepared to convert their dollar-based savings, they mainlyprefer the euro to the dram.

CBA officials said 57 percent of some 2,300 people randomly polledacross the country have until now kept their cash in the U.S. currencyand nearly one third of them would like to switch to the euro. Only 6percent said they have euro savings at the moment.

According to the survey, the dram's share in the overall savings is onlylikely to grow from the current 35 percent to 37 percent in the comingmonths. In the words of Hakob Zorian, head of the CBA's StatisticsDepartment, Armenians continue to distrust their currency because theirmemories of the hyperinflation of the early 1990s still run deep. Zoriansaid it will take several more years to eradicate what he described as a`dollar hysteria.'

The dram, which was introduced in November 1993, has gained over 20percent in its value, measured against the dollar, and 15 percentagainst the European Union's common currency since the beginning of2004. The CBA chairman, Tigran Sarkisian, said last month that it couldrise against the dollar by another 10 percent in the course of thisyear.

Sarkisian and other Central Bank officials attribute the phenomenon to a50 percent jump in cash remittances sent last year by Armenians workingabroad. The bank estimates them at $760 million. Officials say the realfigure could be twice as higher.

The dram's strengthening has hit hard Armenians dependent on thoseremittances. The CBA survey shows that about 40 percent of the country'spopulation receives financial aid from abroad. Zorian claimed,nonetheless, that it is mostly middle-class and wealthy citizens thathave borne the brunt of the dollar depreciation.

Zorian also said the poll found that 55 percent of Armenian householdslive in poverty. The figure differs markedly from a 42 percent povertyrate cited by the Armenian government.

But it is evident from the first articles of this thread that US is increasingly dependent of a number of large economies which are not US allies and could potentially move to undemine US economic strength. However, this is not yet evident. In case of China for example ... if it wants to intentionally contribute to depreciation of the dollar it will start losing its nearly $100bln trade surpluss with the US. So it is not that easy for countries that depend on the US for their exports to manipulate the currency market without immediate negative consequences for them. Russia on the other hand could easily make such a move.

Indeed. I believe the author did mention that it would be deleterious for other countries if the dollar weakened. I think what will happen is more a result of unintended consequences as opposed to any intended ones.

Indeed. I believe the author did mention that it would be deleterious for other countries if the dollar weakened. I think what will happen is more a result of unintended consequences as opposed to any intended ones.

Well, then it is just the high time to start some big military adventure somewhere far the US cost. It always balanced the US deficit.

"The price of gasoline is less than a penny from the record, the government reported Monday, meaning that a record is probable this week," according to USA Today.

"U.S. average for a gallon of unleaded regular is $2.058, the U.S. Energy Information Administration said in its weekly fuel-price report. That's up a hefty 5.7 cents from last week and just 0.8 of a cent shy of the $2.064 nominal record EIA posted last May 24."

In "What's the Answer for High Gasoline Prices? Nothing," Jerry Taylor, director of Cato's natural resource studies, and Peter Van Doren, editor of Cato's Regulation magazine, argue that "gasoline prices seem relatively high today largely because we still have rather fresh memories of 1998 -- the year in which records were set for the lowest inflation-adjusted fuel prices in American history. However, once we adjust for the changing value of the U.S. dollar, gasoline prices are not particularly high at all if compared to the historic record. While it's true that prices at the pump are significantly higher now than they were last year, higher fuel prices have only set back households by an average of $25 a month in 2004."

the national debt ceiling was just increased to $9 billion. just to put that in prospective. that is equivalent to $30,000 for every person including children and old retired people. thats like the government has barrowed 30k from each of us.

the national debt ceiling was just increased to$9 billion. just to put that in prospective. that is equivalent to $30,000 for every person including children and old retired people. thats like the government has barrowed 30k from each of us.

Azat, did you not mean "trillion"? Or was it "quadrillion"?9 billion? Even Kirk can fill that gap several times over from his petty cash and piggy bank.

and not to mantion us barrows 1 billion from china every monththe trade deficit with china has gone up 100 billion just last year alone, US has become of coutry of consumersthe homeoners are starting to feel the heat, many cant make payments, real estate has gone down, I afread something very huge is about to burst.

my last years sales have gone down almost 50% due to manyof my customers have gone to china, and china is fast is becoming 2nd strongest economy. thanks to abushik

Get a good reputable stock broker and play the stock market. He may up your dollars to make up for the clients that you have lost? You have to take chances with your dollars though and you mustn't be upset sometimes when you lose money. Some new companies' shares are worth investing when they are low and then you'll see them grow and before you wait a lot you buy out at the right time.

Have you ever been interested in the stock market Ed?

You may want to investigate in it and check them out daily though before you start investing in any kind of large amounts of money.

Get a good reputable stock broker and play the stock market. He may up your dollars to make up for the clients that you have lost? You have to take chances with your dollars though and you mustn't be upset sometimes when you lose money. Some new companies' shares are worth investing when they are low and then you'll see them grow and before you wait a lot you buy out at the right time.

Have you ever been interested in the stock market Ed?

You may want to investigate in it and check them out daily though before you start investing in any kind of large amounts of money.